This year’s been difficult for income investors. Many big dividends have been cut and interest rates on cash savings have also fallen. Fortunately, dividend forecasts for 2021 suggest many big payers will return to regular payouts next year.
Today, I’m going to look at the dividend forecasts for three top FTSE 100 income stocks — Lloyds Banking Group (LSE: LLOY), BP (LSE: BP) and Tesco (LSE: TSCO).
Lloyds battles regulator for dividend release
At the start of April, the UK’s banking regulator ruled that none of the big banks would be allowed to pay a dividend this year. So far, nothing’s changed.
However, Lloyds’ third-quarter results suggested that bad debts haven’t risen as quickly as expected so far this year. Lloyds returned to profit during the quarter with a pre-tax profit of £1bn and a return on tangible equity of 7.4% — I see that as a respectable result in the circumstances.
The bank’s regulatory CET1 ratio — which measures surplus capital — also looks strong to me, at 15.2%. That’s well above the 11% minimum specified by the regulator. To me, this suggests that unless losses worsen as we head into 2021, the bank should have enough spare capital to resume dividend payments.
City analysts seem to agree. Their dividend forecasts suggest a payout of 1.54p per share in 2021, which would give the stock a yield of 5.5%.
BP dividend forecast backed by management
Some speculation is involved in attempting to predict how much cash Lloyds will be able to pay out next year. With BP, the picture looks much more certain. Although the exact yield will be affected by the USD/GBP exchange rate, I’m confident the forecast yield of 9% is realistic.
The reason for this is that new CEO Bernard Looney recently laid out a new fixed dividend policy, payable at 5.25 cents each quarter for the foreseeable future.
Surplus cash over and above this amount will be used to fund share buybacks, not dividend growth. This policy makes sense given that Looney has also committed to cutting oil and gas production by 40% over the next 10 years.
Although investment in low carbon energy is going to be ramped up, I think it’s fair to assume BP will become a smaller company. Buying back shares will help to offset BP’s shrinkage and support higher earnings per share.
I can see some attractions in BP shares. This is a stock I’d consider owning for income.
Every little helps: Tesco lifts payout
The UK’s biggest supermarket has had a busy year. Sales surged during lockdown. Although Covid-related extra costs kept profits largely flat, I think there’s no doubt it’s been a good year overall for Tesco.
New chief executive Ken Murphy seems to agree. One of his first acts after joining was to issue the firm’s interim results. These included news of a 20.8% increase to the interim dividend.
This half-year payout will rise to 3.2p per share this year. Analysts expect a payout of 7.9p for the year ending 29 February 2021. This would give a dividend yield of 3.8%.
Looking ahead to the firm’s 2021/22 financial year, dividend forecasts suggest the payout will rise by a further 15% to 8.9p. That would give Tesco stock a dividend yield of 4.3%.